The Evolving Impact of the Post-Pandemic Federal Funds Rate Hikes on the Dollar Index

Abstract

On March 17th, 2022, the Federal Reserve issued its first federal funds rate hike to address elevated inflation rates and consumer prices amidst the post-pandemic period. By July 2023, the Fed had raised the rate eleven times, increasing it from 0.25% to 5.50%. These monetary policies not only played a role in stabilizing prices and containing inflation but also contributed to strengthening the U.S. dollar index. This research analyzes the quantifiable impact of these rate hikes on the dollar index by implementing time series models and creating visualizations of daily, weekly, and monthly index trends. Specifically, leveraging data from 2010 to 2023 and utilizing ARIMA modeling, the goal is to provide an understanding of the relationship between the Feds monetary policy choices and the standing of the U.S. dollar in global financial markets. A key finding is that there is a positive increase in the dollar index change after the rate hikes compared to no action by the Fed. The daily data is less convincing than the monthly data in reaching this conclusion.